this is probably a stupid question but i just cant figure it out. when you have a model that calculates the PV for an investment(zero coupon) at different ages. so if its a 1- year investment, the PV is different in the beginning, after one month, after two months, and so on. At two months, for example, is this PV the present value of the remaining cash flows only or is it just the value of the whole investment at that specific time? I always thought PV is just calculated as the present value of the remaining cash flows only, which would mean PV will keep decreasing as the age of the investment gets bigger. But I’m looking at a sample model, and the PV here increases as it ages. Or, can it just be that the rates decreased so much in those two months that even though there are fewer cash flows, the PV still increases? any ideas? thx.
if its a zero coupon…theres only one cashflow…and as time goes by and you get closer to the cashflow (assuming the discount rate stays the same)…the PV will increase Assuming discount rates stay the same, a coupon paying bond will converge to Par value as time goes by (i.e. the value of a bond trading at a premium to par value will decrease while the value of a bond trading at a discount will increase)
The PV is the present value of remaining cash flows. And it should also be the value of the whole investment at the present time (or you have an arbitrage opportunity). With a zero coupon, as Syd_RE mentioned, you have only one payment, so the PV is going to converge to the par value as you approach the maturity date. With zeros, you have no reinvestment risk, so the only things that really matter are interest rate changes, default risk (if non-treasury), and any embedded options.